Analyzing Changes in Financial Position

Equation Analysis Sheets Two ways to look at the increase in capital. 1. Metro Movers is a service business. When they do the move for B. Cava, he legally owes $1500. This is a gain for Metro Movers. Therefore, the Owner’s Equity (capital) is increased (J. Hofner). 2. The owner gets to claim whatever is left after liabilities are paid. Assets went up, liabilities did not, so the Owner’s capital goes up.

Equation Analysis Sheets J. Hofner, the owner of Metropolitan Movers, withdraws $500 for personal use.

Equation Analysis Sheets One of the company’s trucks requires an engine adjustment costing $375. The repair is paid for in cash when the truck is picked up. What do we have to think about?

Updating the Balance Sheet So we have a balance sheet that is now out of date. We need to update our balance sheet to show all the changes that we just made.

Updating the Balance Sheet. Step 1: IDENTIFY ALL ASSET AND LIABILITY ITEMS THAT NEED TO BE CHANGED AND MAKE ALL NECESSARY CHANGES -You want to make sure that you properly classify the information. Step 2: SEE IF THE OWNER’S EQUITY HAS CHANGED. -Remember the equation. If assets decrease and liabilities also decrease, what happens to equity? -If assets decrease and liabilities are unchanged, what happens now?

Updating the Balance Sheet Step 3: MAKE CERTAIN THAT AT LEAST TWO OF THE INDIVIDUAL ITEMS HAVE CHANGED -It is possible for several items to change, but not only one. Step 4: MAKE SURE THE EQUATION IS STILL IN BALANCE. -Assets must always equal liabilities and equity

Develop good work habits! You need to be accurate! Who would be happy with an 80% on a test? If you are 80% right in accounting procedures, that means you are 20% wrong. Memory is not good enough to remember all of the transactions you could be dealing with. You need common sense, clear thinking, and a good understanding of accounting theory.

Let’s review 1. Why is the Equation Analysis Sheet necessary? 2. What is transferred from the balance sheet to the equation analysis sheet? 3. How do you know if the changes for a transaction recorded on an equation analysis sheet are balanced? 4. Does a transaction always change both sides of the accounting equation? 5. How could the description of the engine repair transaction be changed so that only the right side changes?

Let’s review 6. What four steps should be used to analyze the changes caused by a transaction? 7. What is a good clue as to whether the capital increased or decreased. 8. Assets increase by $10,000 with no corresponding change in liabilities. What change is there in capital? 9. What do good accountants rely on apart from their memory? 10. Why must accounting be done accurately?

One exercise all together Here is the financial position for Sheila’s Interior Decorating, owned by Sheila Kostiuk.

Stationery and supplies are purchased from Home Supply on credit for $175. They will be paid within 30 days. A new desk for the office is purchased for $450 cash. E. Kerluck, a debtor, pays his debt in full. A used car costing $6500 is purchased from Pine Motors. A down payment of $500 is made. It is agreed that the remainder of the purchase price will be paid within three months. Home Supply, a creditor, is paid $700. The owner, S. Kostiuk, withdraws $200 from the business for her own use.

Homework Do exercise #2 and 3 on pages 70 and 71. We will discuss them tomorrow.